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Mortgage Down Payment Gifts – Allowed but Tricky

Very often, family members want to help first time home buyers by giving the buyers money for the down payment for a home. This is still commonly allowed on FHA and conventional loans, but in recent years, the steps lenders require for this gift have changed.

In the past, the family member just had to write a letter, commonly referred to as a “gift letter”, for the down payment to be allowed. The gift letter had to state that the family member was giving the funds and did not expect repayment. If repayment was expected, that would be a loan, not a gift, and wasn’t allowed by lenders.

Today, lenders still require the gift letter, but it is now a form that the lender provides for the borrower and the gift donor to sign. Additionally, they now require proof of where the gifted funds come. This is known as “sourcing” and is where it can get tricky. Lenders require the family members giving the funds to show documentation where the funds originated, such as a bank statements, retirement statements, etc.

Sourcing gifted funds can be extremely frustrating to the family and can potentially kill the loan. Family members have said:

“I’m not getting a loan. Why do I have to show my bank statements?”
“That’s none of the lender’s business.”
“That’s my daughter. I can give her money anytime I want.”
“I’m not showing my personal, financial information to a lender.”

Real estate agents and lenders need to prepare their buyers and their families upfront. No longer will a simple gift letter do. Sourcing down payment gifts is like looking a gift horse in the mouth, but that’s the way it is … this is the new reality in mortgage lending.

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